ARTICLE - Buy-Sell Agreements

Does Losing a Business Partner Mean Losing
His or Her Share of the Business?
Protect Your Business with a Buy-Sell Agreement

     There’s no delicate way to put it.  You should be concerned about what would happen to your business if you or a co-owner became disabled or were to die. 

     Truth is, without a business continuity plan in place, there may not be a market for an interest in your business.  Even your business may not be able to purchase the interest of a disabled or deceased owner because it lacks the liquidity necessary to fund the purchase.

     There are steps you can take to assure that a successor to an interest in the business is agreed upon now, or that you or the business can buy an owner's share should anything happen.

     You can set up what is known as a “Buy – Sell Agreement.”  This agreement can provide that in the event an owner dies or becomes disable, his or her interest in the business will be sold to the business or to the remaining owners or to an agreed upon third party.  Simply stated, a Buy-Sell Agreement ensures a known ownership succession and continuation of the  business, should anything happen to one or more owners.

     But a Buy-Sell Agreement needs the correct funding to be effective; typically, funding comes from life* and disability income insurance policies.  These policies can be used to fund two types of Buy-Sell Agreements – Buy-Sell Cross Purchase Agreements and Buy-Sell Entity Purchase Plans. 

     Here are examples of how these can work for you:   what’s the actual value of your business, and each  partner’s share in it.  It’s important to work with a team – you, your financial planner, attorney, accountant, and business appraisal expert – to determine the strategy and funding that’s best for you, your partners, and your business.  Don’t wait for disaster to strike – agree what will be done tomorrow, today! 

 Buy-Sell Cross Purchase Agreement

     Jane and John own a business together, so they set up an agreement to sell their shares of the business to each other in the case of their death or disability.  To fund the agreement, Jane owns a disability insurance policy on John and uses the proceeds from that policy to purchase John’s share of the business if John becomes disabled and wants to sell his share.  Additionally, Jane owns a life insurance policy on John, so if he dies, she can use the proceeds to purchase his share from the estate.  Likewise, John owns disability and life insurance policies on Jane.

     This method of funding provides each partner with the proceeds to purchase the company without having to liquidate a part of the business.

Buy-Sell Entity Purchase Plan

     Now, let’s say we have a corporation with four major stock holders: Jane, John, Jack and Jill.  For this scenario, a Buy-Sell Entity Purchase Plan can be used.  In this case, the entity purchases disability and life insurance policies on each stock holder.  In the event of their deaths, the business uses the proceeds from the life insurance policy to buy back the deceased’s shares.

     Despite their simple strategy, funding these agreements can be tricky, and involves many variables, such as how much to fund each policy, what types of policies are best to use,   Unless it qualifies for the small corporation exemption, a corporation may be subject to corporate AMT, which may affect the tax treatment of corporate owned life  insurance policies.  Consult your tax advisor to determine the applicability and potential effect of corporate AMT in your own situation.  Policy withdrawals and outstanding policy loans (including any accrued interest) usually reduce the death benefit payable under the policy.

J. George Reilly
Account Executive, Financial Advisor, Financial Services Representative
Reilly Financial Group, An Office of MetLife®
371 Hoes Lane, Suite 204
Piscataway, NJ 08854
Phone:  732.465.0899  or    732.981.0470 x139

Metropolitan Life Insurance Company (MLIC), New York, NY 10166. Securities products and investment advisory services offered by MetLife Securities, Inc. (MSI)(member FINRA/SIPC) and a registered investment adviser, New York, NY 10166. MLIC and MSI are MetLife companies.